Category Archives: Investments

My 401k Is Still Under Water So I’m Using Dollar Cost Averaging To Bring It Back Up

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I confess, my 401k portfolio was invested too aggressively in 2008.  I’m still down big as the chart shows below: (Ouch, yes it hurt me just to look at it)

401KBalance2008_and_2009

Yes, the cumulative rate-of-return from the beginning of 2008 to the end of 2009 is -18.6%.  Looks pretty bleak for me huh…  So what did I do in 2008-2009 to rectify the problem?  I increased my contribution rate to the maximum percentage that I’m allowed to.  So as the market was going down, I was hoping to take advantage of a concept call dollar-cost averaging.

What is Dollar-cost averaging?  Well if you allocate a constant amount of money for buying a security (stocks, bonds, mutual funds, ETFs… etc) in a measured time period (for example, quarterly), it enables you to buy more shares in a bear market (or less in a bull market) of that security.  So when the market is declining, you buy more shares of a security, and that’s what I’ve been banking on.  Now that we’ve had a decent run-up in the valuation of the stock market, I would be more hesitant now…

Let’s me give example.  Say, I buy $100 dollars worth of a stock (let say BAC) every once a quarter (random purchase date)…

So that means that during the following time periods I bought the following shares:

Amount
Price of the Amout of Cumulative Value of
Invested Date BAC Stock Shares Shares Shares
100 12/03/08 34.48 2.9 2.9 99.99
100 01/23/09 6.24 16.03 18.93 118.1
100 05/01/09 8.7 11.49 30.42 264.65
100 10/30/09 14.58 6.86 37.28 543.52
400 01/02/10 15.06 37.28 37.28 561.42

This would be about a 40% return on my investment (If I did this, which I didn’t of course…, but it’s a good example).

So, yes I’m not happy that I’m still down, but taking everything as a whole, I’m doing okay, even if I am still down from my portfolio high at the end of 2007!

I Am "Greedy When Others Are Fearful!"

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My title today is based on the following quote that Warren Buffet presented in one of his annual stockholder meetings.

Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy when others are fearful.

In beginning of 2009, I changed my 401(k) contribution percentage to the maximum that it could be for the company that I work at (15% of my salary).  I made my decision based on the quote above, and on the confidence I got from reading about Warren Buffet making his stock purchases in the later portion of 2008.  Most people I talked to were pulling their money out of the stocks and putting them in money market funds or bonds.  This is what you don’t want to do!  After the market has tanked around 40%, I didn’t want to pull my money out and have it sit in cash.  That’s selling low and buying high, very bad!

While the smoke hasn’t totally cleared yet, everything is looking very positive at this current moment in time.  I believe that it helps having assets is different types of investments.  I think Jim Cramer is right on this one “Diversification is the only free lunch”.

Lunch Budget Experiment #2 – Buying the Stock

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In my previous post about my “Lunch Experiment“, I mentioned that I was looking at buying a type of dividend producing stock called a REIT (Real Estate Investemnt Trust).

Stock Hunting Adventure Ends

My Stock Hunting Adventure Ends

Well, this past Friday, I decided to jump in the market while it was low from the Dubai World credit crisis fallout.

Even though the market might move lower on Monday, I’m pretty confident that it isn’t going anywhere near the recent recessionary low that we experienced in March 2009.  “Sell high, buy low”, if possible (actually I prefer dollar-cost-averaging for my real investments).

So what did I buy?

First, let me say that I can afford to lose this money.  The stock was bought with money that I would have wasted on buying “out of the office” meals at work.  This is the reason that I call this an experiment, and the money involved truly is non-necessary money.

On to what I bought.  Drumroll… I bought AHN (Anworth Mortgage Asset Corporation)!  This REIT company does the following:

“…invests primarily in United States agency mortgage-backed securities issued or guaranteed by United States government sponsored entities, such as Fannie Mae or Freddie Mac, or an agency of the United States government, such as Ginnie Mae, including mortgage pass-through certificates, collateralized mortgage obligations, and other real estate securities, on a leveraged basis…” – from finance.yahoo.com

Why did I buy it?

I bought this stock for the 15.5% dividend yield.

How much did I buy?

I bought $2,000 dollars worth.  I decided to take an extra $1,000 from my regular brokerage account (that was sitting in cash) and put it extra towards the experiment.  So now I owe my regular account $1,000.

How much money will I get from the quarterly dividend?

If you consider taxes as part of the decision this is trickier than it sounds.  Not taking into account taxes (for example, if I put bought ANH  in a Roth IRA), I would receive ($2,000 x .155) = $310 dollar annually ($25 a month and about $6 a week).  Currently, I’m holding this in my regular stock account, but in January 2010 this is going into my Roth.  For more information about REITS, see this wiki article (especially the taxing info.)

Why did I put in extra money?

The extra $1,000 that I added will enable me to take 1 additional lunch as soon as the dividend is paid out, instead of waiting 25 24 additional weeks.  this will enable me to start enjoying the lunch out with friends in a few months, instead of waiting 1/2 a year (not to mention the current high dividend).  Though honestly, I could have waited…

Potential Pitfalls

The company may cut or reduce it’s dividend.  Yes, I’m taking more risk than is customary for me.   I’m willing to roll with the punches though.

Tell me what you think of my latest move?  What kind of strategy would you pursue?   Is my timing bad?

-MR

Related Posts:

Lunch Budget Experiment Update #3

Lunch Budget Experiment Update

Paying An Adult Allowance

Emotional Reactions to Stock Market Swings

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I found this really funny cartoon while I was searching MonyNing.com’s website.  While looking at MoneyNing.com blog archive, I came across this article “Not Caring About the Wild Stock Market Swings” and I would like to point out the importance of the article, especially how I was affected.

I hope the stock I just bought doesnt do this!

I hope the stock I just bought doesn’t do this!

MoneyNing posted the article last year during October (2008), right after the DOW index at one point was down 800 points.  Although, I’m sure she wasn’t happy about it, she goes on to say that she wasn’t depressed about it either.  This is the perfect way to approach it!  This means that the stock market movements has lost control over her.  You might think how can an abstract concept like the DOW index control us?  Sadly, too much…  I was depressed as I saw the value in the market practically cut in half.

How depressed was I about it?

Very, 🙁 “nuff said”… but today it’s different.  As I sprint into the next few months, I’ll be running towards becoming debt free.  After I’m debt free, I’ll be able to relax much much more.  In fact, I’ve already started to do so.  I’m also starting to diversify my investment allocations, so that I don’t have as much money in just risky (high beta) stocks.

If you are only in risky stocks as I was (not counting my 401k), perhaps you should try asset diversification too.  First pay off your debt (Credit cars, car, house, etc), next check out the options that are available for money to be diversified into (Stock, Mutual funds, Foreign mutual fund, ETFs, Bonds, etc…).  Next check out some of the investment blogs out there.  There is some excellent advice out there.

Don